A recent U.S. Court of Appeals for the First Circuit decision, Cooper vs. D’Amore, No. 17-1442 (1st Cir. 2018), clarified what constitutes termination of an Individual Retirement Account.
Background
Alyssa D’Amore was the beneficiary on an IRA account of her former husband, Peter M. Cooper Jr. when he died in 2012, but in 2014, Cooper’s mother and brother filed suit in U.S. District Court claiming, among other things, that the IRA account had been terminated in 2011 based on a transfer form that Cooper had signed. In the Feb. 2, 2018 decision, the First Circuit reversed a January 2017 summary judgment in favor of the Cooper family and instead ordered the District Court to enter summary judgment for D’Amore.
The facts of the case were extremely complex. D’Amore and Cooper worked together in the financial services field before and during their marriage, and even after their amicable divorce in 2006. They had remained close despite the divorce. Cooper, who was a successful bond trader, named D’Amore as beneficiary of his IRA account with his employer, Mesirow Financial, in 2003, but he never revoked the beneficiary designation even after the divorce. He even continued to pay D’Amore alimony longer than he was required to do under their divorce agreement. In 2011, Cooper signed a transfer form to move the majority of his Mesirow IRA assets to an IRA at another investment firm. Not all of the assets could be transferred. Instead of directing that they be liquidated, Cooper directed his financial advisor at Mesirow to keep those assets in the Mesirow IRA account. After Cooper died in 2012, Cooper’s family sued, claiming the Mesirow IRA assets belonged to his estate and not D’Amore.
Did Transfer Form Terminate Beneficiary Designation?
The key issue in the case was whether D’Amore’s beneficiary designation was automatically terminated by a transfer form that Cooper signed with the new financial firm that didn’t require liquidation or transfer of all his Mesirow IRA assets. D’Amore argued that because the IRA account itself remained open and held assets under the written account agreement, the form couldn’t have terminated the account or caused it to lose its protected status as an IRA account. She also emphasized the potentially devastating consequences that the trial court’s decision could have on all owners of retirement accounts.
The District Court ruled against the argument. Robert J. O’Regan, partner at Burns & Levinson, the firm that represented D’Amore, explained just how dire the implications of such a decision are:
“Imagine the consequences of this. If a person rolls over assets from one account to another and all of the assets don’t transfer, which occurs, then the remaining assets would be subject to taxes and penalties because the loss of IRA status means the depositor would be deemed to have received a distribution.”
He went on to say, “There are many reasons why a complete transfer might not occur. Here, it was because Peter Cooper did not direct all of the assets to be moved. But there are many other reasons why the same standard form used by many financial institutions could result in the same, very bad consequences—because of a mistake on the form, an error in execution, illiquid assets that cannot be transferred, or a host of other problems.”
O’Regan also noted that the problem could be especially devastating to retirees who depend on the tax benefits and regular distribution schedules planned from their retirement accounts and can’t afford to pay the taxes and penalties that could flow from a defect on a form or a mistake with a transfer.
U.S. Court of Appeals for the First Circuit Reversal
The U.S. Court of Appeals for the First Circuit reversed the District Court’s decision, holding that the transfer form and the partial transfer of assets didn’t terminate the IRA. In finding so, the Court reasoned that the termination clause of the IRA account “does not distinguish between transferable and nontransferable assets. The only reasonable construction of this clause is that a request to transfer all assets must be precisely that: a request to transfer the transferable assets as well as the nontransferable ones. Had the contract meant to provide otherwise, it could have stated that a transfer of all assets means the transfer of only those assets that are transferable.” The Court also determined that Mesirow statements that stated the beneficiary was “not provided” didn’t establish that the beneficiary designation was removed.
Since a request to transfer all assets was never made; and in fact, there was evidence that Cooper intended to keep the account open, the Court concluded that the beneficiary designation was never revoked and D'Amore was entitled to the remaining assets in the account upon decedent’s death.
“We are very pleased that we could bring clarity to the law governing the distribution and termination of retirement fund assets,” said O’Regan.
